|FORM 10-Q



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|----------------------------------------------------------------------

| |  | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended June 30, 2004
Commission file number: 0-20050
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Princeton National Bancorp, Inc.
(Exact name of registrant as specified in its charter)
|---------------------------------------------------------------------------------------

|Delaware                                              | 36-3210283                          
|----------------------------------------------------- | ------------------------------------
|(State or other jurisdiction                          | (I.R.S. Employer Identification No.)
|of incorporation or organization)                     |                                     
|606 S. Main Street,, Princeton, IL 61356             
|(Address of principal executive offices and Zip Code)

|(815) 875-4444
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes

üNoo


Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).   Yes

üNoo

As of July 15, 2004, the registrant had outstanding 3,083,532 shares of its
$5 par value common stock.

Page 1 of 22 pages
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# Part I:   FINANCIAL INFORMATION

The unaudited consolidated financial
statements of Princeton National Bancorp, Inc. and Subsidiary and managements
discussion and analysis of financial condition and results of operations are presented in
the schedules as follows:

|Schedule 1: |  | Consolidated Balance Sheets                                                           | 
|----------- |  | ------------------------------------------------------------------------------------- | 
|Schedule 2: |  | Consolidated Statements of Income and Comprehensive Income                            | 
|Schedule 3: |  | Consolidated Statements of Stockholders Equity                                       | 
|Schedule 4: |  | Consolidated Statements of Cash Flows                                                 | 
|Schedule 5: |  | Notes to Consolidated Financial Statements                                            | 
|Schedule 6: |  | Managements Discussion and Analysis of Financial Condition and Results of Operations | 
|Schedule 7: |  | Controls and Procedures                                                               | 

# Part II:   OTHER INFORMATION

# Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

| | (e) |  | The
following table provides information about purchases of the Corporations common
stock by the Corporation during the quarter ended June 30, 2004:
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|Period            |  | (a) Total number ofshares purchased |  | (b) Average price paidper share |  | (c) Total numberof shares purchasedas part of apublicly announcedplans or programs |  | (d) Maximum number(or approximate dollar value) of shares that may yet be purchased under the plans or programs
|----------------- |  | ----------------------------------- |  | ------------------------------- |  | ---------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------
|4/1/04  4/30/04  |  | 0                                   |  | $0.00                           |  | 0                                                                                  |  | 63,000                                                                                                         
|5/1/04   5/31/04 |  | 20,000                              |  | $28.68                          |  | 20,000                                                                             |  | 43,000                                                                                                         
|6/1/04   6/30/04 |  | 15,000                              |  | $29.10                          |  | 15,000                                                                             |  | 28,000                                                                                                         
|                  |  |                                     |  |                                 |  |                                                                                    |  |                                                                                                                
|Total             |  | 35,000                              |  | $28.86                          |  | 35,000                                                                             |  | 28,000                                                                                                         
|                  |  |                                     |  |                                 |  |                                                                                    |  |                                                                                                                

|(1) |  | We purchased an
aggregate of 35,000 shares of our common stock pursuant to the repurchase
program that we announced on January 26, 2004 (the Program).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Our Board of
Directors approved the repurchase by us of up to an aggregate of 100,000 shares
of our common stock pursuant to the Program. The expiration date of this Program
is January 26, 2005. Unless terminated earlier by resolution of our Board of
Directors, the Program will expire on the earlier of such expiration date or
when we have repurchased all shares authorized for repurchase under the Program.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Item 4.   Submission of Matters to a Vote of Security Holders

The Annual Meeting of
Shareholders of Princeton National Bancorp, Inc. was held on April 27, 2004, for the purpose of electing five directors each to
serve for a term of three years. Proxies for the meeting were solicited by Management pursuant to Regulation 14A under the
Securities Exchange Act of 1934, and there was no solicitation in opposition to Managements solicitation.

All five of Managements
nominees for director listed in the proxy statement were elected. The results of the vote were as follows:

|                 | SharesVotedFor |           | SharesWithheld |        | Abstain
|---------------- | ---------------- | --------- | ---------------- | ------ | -------
|Daryl Becker     |                  | 2,571,883 |                  | 10,045 |        
|Sharon L. Covert |                  | 2,572,227 |                  | 9,700  |        
|Mark Janko       |                  | 2,571,469 |                  | 10,459 |        
|James B. Miller  |                  | 2,474,273 |                  | 10,765 |        
|Stephen W. Samet |                  | 2,544,157 |                  | 37,771 |        

In
addition, the following directors terms of offices continued after the meeting:

|Gary C. Bruce     |  | Ervin I. Pietsch | 
|----------------- |  | ---------------- | 
|John R. Ernat     |  | Tony J. Sorcic   | 
|Donald E. Grubb   |  | Craig O. Wesner  | 
|Thomas M. Longman | 

# Item 6.   Exhibits and Reports on Form 8-K

| | (a) |  | Exhibits:
| | --- |  | ---------

| |  | 31 |  | Certification of Tony J. Sorcic required by Rule 13a-14(a).
| |  | -- |  | -----------------------------------------------------------

| |  | 31 |  | Certification of Todd D. Fanning required by Rule 13a-14(a).
| |  | -- |  | ------------------------------------------------------------

| |  | 32 |  | Certificaton of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
| |  | -- |  | ------------------------------------------------------------------------------------------------------------------------------------

| |  | 32 |  | Certificaton of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
| |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | The Corporation filed an 8-K on April 28, 2004 related to the
announcement of first quarter 2004 earnings. The Corporation filed an 8-K on May 26, 2004 for a letter to the company shareholders.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

|                       |                                                         |                                  |                       |  | 
|---------------------- | ------------------------------------------------------- | -------------------------------- | --------------------- |  | 
|                       |                                                         | PRINCETON NATIONAL BANCORP, INC.
|Date:   August 5, 2004 |                                                         | By                               | /s/   Tony J. Sorcic  |  | 
|                       |                                                        
|                       | Tony J. SorcicPresident & Chief Executive Officer       |                                 
|Date:   August 5, 2004 |                                                         | By                               | /s/   Todd D. Fanning |  | 
|                       |                                                        
|                       | Todd D. FanningVice-President & Chief Financial Officer |                                 

2

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Schedule 1

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except share data)

|                                                          | June 30,2004 |  | December 31,2003
|--------------------------------------------------------- | ------------ |  | ----------------
|ASSETS                                                    |              |  |                 
|Cash and due from banks                                   |              |  | $               
|Interest-bearing deposits with financial institutions     |              |  |                 
|Federal funds sold                                        |              |  |                 
|                                                          |              |  |                 
|Total cash and cash equivalents                           |              |  |                 
|Loans held for sale, at lower of cost or market           |              |  |                 
|Investment securities:                                    |              | 
|Available-for-sale, at fair value                         |              |  |                 
|Held-to-maturity, at amortized cost                       |              |  |                 
|                                                          |              |  |                 
|Total investment securities                               |              |  |                 
|Loans:                                                    |              | 
|Loans, net of unearned interest                           |              |  |                 
|Allowance for loan losses                                 |              |  |                 
|                                                          |              |  |                 
|Net loans                                                 |              |  |                 
|Premises and equipment, net of accumulated depreciation   |              |  |                 
|Bank-owned life insurance                                 |              |  |                 
|Interest receivable                                       |              |  |                 
|Goodwill, net of accumulated amortization                 |              |  |                 
|Intangible assets, net of accumulated amortization        |              |  |                 
|Other real estate owned                                   |              |  |                 
|Other assets                                              |              |  |                 
|                                                          |              |  |                 
|TOTAL ASSETS                                              |              |  | $               
|                                                          |              |  |                 
|LIABILITIES                                               |              | 
|Deposits:                                                 |              | 
|Demand                                                    |              |  | $               
|Interest-bearing demand                                   |              |  |                 
|Savings                                                   |              |  |                 
|Time                                                      |              |  |                 
|                                                          |              |  |                 
|Total deposits                                            |              |  |                 
|Borrowings:                                               |              | 
|Customer repurchase agreements                            |              |  |                 
|Advances from the Federal Home Loan Bank                  |              |  |                 
|Interest-bearing demand notes issued to the U.S. Treasury |              |  |                 
|Federal funds purchased                                   |              |  |                 
|Note payable                                              |              |  |                 
|                                                          |              |  |                 
|Total borrowings                                          |              |  |                 
|Other liabilities                                         |              |  |                 
|                                                          |              |  |                 
|TOTAL LIABILITIES                                         |              |  |                 
|                                                          |              |  |                 
|STOCKHOLDERS EQUITY                                      |              | 
|Common stock:  $5 par value, 7,000,000 shares            
|authorized; 4,139,841 issued                              |              |  |                 
|Surplus                                                   |              |  |                 
|Retained earnings                                         |              |  |                 
|Accumulated other comprehensive income (loss), net of tax |              |  |                 
|Less: Cost of 1,056,309 and 1,015,838 treasury shares at 
|June 30, 2004 and December 31, 2003, respectively         |              |  |                 
|                                                          |              |  |                 
|TOTAL STOCKHOLDERS EQUITY                                |              |  |                 
|                                                          |              |  |                 
|TOTAL LIABILITIES AND                                     |              | 
|STOCKHOLDERS EQUITY                                      |              |  | $               
|                                                          |              |  |                 

See accompanying notes to consolidated financial statements

3

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Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except share data)

|                                                          | For the Three MonthsEnded June 30 |  | For the Six MonthsEnded June 30
|--------------------------------------------------------- | --------------------------------- |  | -------------------------------
|
|Interest income:                                          |                                   |  |                                
|Interest and fees on loans                                |                                   |  | $                              
|Interest and dividends on investment securities           |                                   |  |                                
|Interest on federal funds sold                            |                                   |  |                                
|Interest on interest-bearing time deposits in other banks |                                   |  |                                
|                                                          |                                   |  |                                
|Total interest income                                     |                                   |  |                                
|Interest expense:                                         |                                   | 
|Interest on deposits                                      |                                   |  |                                
|Interest on borrowings                                    |                                   |  |                                
|                                                          |                                   |  |                                
|Total interest expense                                    |                                   |  |                                
|                                                          |                                   |  |                                
|Net interest income                                       |                                   |  |                                
|Provision for loan losses                                 |                                   |  |                                
|                                                          |                                   |  |                                
|Net interest income after provision                      
|for loan losses                                           |                                   |  |                                
|Non-interest income:                                      |                                   | 
|Trust & farm management fees                              |                                   |  |                                
|Service charges on deposit accounts                       |                                   |  |                                
|Other service charges                                     |                                   |  |                                
|Gain on sales of securities available-for-sale            |                                   |  |                                
|Gain on sale of loans                                     |                                   |  |                                
|Brokerage fee income                                      |                                   |  |                                
|Mortgage banking income                                   |                                   |  |                                
|Bank-owned life insurance income                          |                                   |  |                                
|Other operating income                                    |                                   |  |                                
|                                                          |                                   |  |                                
|Total non-interest income                                 |                                   |  |                                
|Non-interest expense:                                     |                                   | 
|Salaries and employee benefits                            |                                   |  |                                
|Occupancy                                                 |                                   |  |                                
|Equipment expense                                         |                                   |  |                                
|Federal insurance assessments                             |                                   |  |                                
|Intangible assets amortization                            |                                   |  |                                
|Data processing                                           |                                   |  |                                
|Advertising                                               |                                   |  |                                
|Other operating expense                                   |                                   |  |                                
|                                                          |                                   |  |                                
|Total non-interest expense                                |                                   |  |                                
|                                                          |                                   |  |                                
|Income before income taxes                                |                                   |  |                                
|Income tax expense                                        |                                   |  |                                
|                                                          |                                   |  |                                
|Net income                                                |                                   |  | $                              
|                                                          |                                   |  |                                
|Earnings per share:                                       |                                   | 
|Basic                                                     |                                   |  |                                
|Diluted                                                   |                                   |  |                                
|Basic weighted average shares outstanding                 |                                   |  |                                
|Diluted weighted average shares outstanding               |                                   |  |                                

See accompanying notes to consolidated financial statements

4

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Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)

|                                                            | For the Three MonthsEnded June 30 |  | For the Six MonthsEnded June 30
|----------------------------------------------------------- | --------------------------------- |  | -------------------------------
|
|Net income                                                  |                                   |  | $                              
|Other comprehensive income (loss), net of tax               |                                   | 
|Unrealized holding gains (losses) arising during the period |                                   |  |                                
|Less:  Reclassification adjustment for realized gains on   
|sales of securities included in net income                  |                                   |  |                                
|                                                            |                                   |  |                                
|Other comprehensive income (loss)                           |                                   |  |                                
|                                                            |                                   |  |                                
|Comprehensive income                                        |                                   |  | $                              
|                                                            |                                   |  |                                

5

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Schedule 3

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
(dollars in thousands, except per share data)

|                                                                          | For the Six Months EndedJune 30
|------------------------------------------------------------------------- | -------------------------------
|
|Balance, January 1                                                        |                                
|Net income                                                                |                                
|Cash dividends  ($0.37 per share in 2004, and $.31 per share in 2003)     |                                
|Other comprehensive loss, net of tax                                      |                                
|Purchases of treasury stock (72,000 shares in 2004, and 75,000           
|shares in 2003)                                                           |                                
|Exercise of stock options and re-issuance of treasury stock               |                                
|(29,068 shares in 2004 and 20,719 shares in 2003)                         |                                
|Sales of treasury stock  (2,564 shares in 2004, and 1,353 shares in 2003) |                                
|                                                                          |                                
|Balance, June 30                                                          |                                
|                                                                          |                                

See accompanying notes to consolidated financial statements

6

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Schedule 4

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)

|                                                                     | For the Six Months EndedJune 30
|-------------------------------------------------------------------- | -------------------------------
|
|Operating activities:                                                |                                
|Net income                                                           |                                
|Adjustments to reconcile net income to net                           |                                
|cash provided by operating activities:                               |                                
|Depreciation                                                         |                                
|Provision for loan losses                                            |                                
|Amortization of other intangible assets                              |                                
|Amortization of premiums on investment                              
|securities, net of accretion                                         |                                
|Gain on securities transactions, net                                 |                                
|Gain on sale of loans                                                |                                
|Gain on sale of premises and equipment                               |                                
|FHLB stock dividends                                                 |                                
|Loans originated for sale                                            |                                
|Proceeds from sales of loans originated for sale                     |                                
|Decrease in interest payable                                         |                                
|Decrease in interest receivable                                      |                                
|Increase in other assets                                             |                                
|Decrease in other liabilities                                        |                                
|                                                                     |                                
|Net cash provided by operating activities                            |                                
|                                                                     |                                
|Investing activities:                                                |                                
|Proceeds from sales of investment securities available-for-sale      |                                
|Proceeds from maturities of investment securities available-for-sale |                                
|Purchase of investment securities available-for-sale                 |                                
|Proceeds from maturities of investment securities held-to-maturity   |                                
|Purchase of investment securities held-to-maturity                   |                                
|Proceeds from sales of premises and equipment                        |                                
|Proceeds from sale of credit card loans                              |                                
|Net increase in loans                                                |                                
|Purchases of premises and equipment                                  |                                
|                                                                     |                                
|Net cash used in investing activities                                |                                
|                                                                     |                                
|Financing activities:                                                |                                
|Net (decrease) increase in deposits                                  |                                
|Net increase (decrease) in borrowings                                |                                
|Dividends paid                                                       |                                
|Purchases of treasury stock                                          |                                
|Exercise of stock options                                            |                                
|Sales of treasury stock                                              |                                
|                                                                     |                                
|Net cash provided by financing activities                            |                                
|                                                                     |                                
|(Decrease) increase in cash and cash equivalents                     |                                
|Cash and cash equivalents at beginning of period                     |                                
|                                                                     |                                
|Cash and cash equivalents at June 30                                 |                                
|                                                                     |                                
|                                                                     |                                
|Supplemental disclosures of cash flow information:                   |                                
|Cash paid during the period for:                                     |                                
|Interest                                                             |                                
|Income taxes                                                         |                                
|Supplemental disclosures of non-cash flow activities:                |                                
|Loans transferred to other real estate owned                         |                                

See accompanying notes to consolidated financial statements

7

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Schedule 5

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)

The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all of the information required by accounting
principles generally accepted in the United States of America for complete financial statements and related footnote disclosures.
In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered for a fair presentation of
the results for the interim period have been included. For further information, refer to the consolidated financial statements and
notes included in the Registrants 2003 Annual Report on Form 10-K. Results of operations for interim periods are not
necessarily indicative of the results that may be expected for the year. Certain amounts in the 2003 consolidated financial
statements have been reclassified to conform to the 2004 presentation.

# (1)   EARNINGS PER SHARE CALCULATION

The following table sets
forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except share data):

|                                 | Three Months EndedJune 30, |  | Six Months EndedJune 30,
|-------------------------------- | -------------------------- |  | ------------------------
|
|Numerator:                       |                            |  |                         
|Net income                       |                            |  | $                       
|Denominator:                     |                            | 
|Basic earnings per share-        |                            | 
|weighted average shares          |                            |  |                         
|Effect of dilutive securities-   |                            | 
|stock options                    |                            |  |                         
|                                 |                            |  |                         
|Diluted earnings per share-      |                            | 
|adjusted weighted average shares |                            |  |                         
|Net income per share:            |                            | 
|Basic                            |                            |  | $                       
|Diluted                          |                            |  | $                       

8

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# (2)   GOODWILL AND INTANGIBLE ASSETS

The balance of goodwill, net
of accumulated amortization, totaled $1,355,000 at June 30, 2004 and December 31, 2003. The balance of intangible assets, net of
accumulated amortization, totaled $1,421,000 and $1,525,000 at June 30, 2004 and December 31, 2003, respectively.

The following table
summarizes the Corporations intangible assets, which are subject to amortization, as of June 30, 2004 and December 31, 2003.

|                        | 2004 |  | 2003
|----------------------- | ---- |  | ----
|
|Core deposit intangible |      |  | $   
|Other intangible assets |      |  |     
|                        |      |  |     
|Total                   |      |  | $   
|                        |      |  |     

Amortization expense totaled
$104,000 for the six months ended June 30, 2004 and June 30, 2003, respectively. The amortization expense will be approximately
$104,000 for the remainder of 2004 and will be approximately $205,000 for each of the next five years.

The Corporations other
intangible assets consist of originated mortgage servicing rights which are included in other assets on the consolidated balance
sheets. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income similar
to the interest method using an accelerated amortization method and are subject to periodic impairment testing. As of June 30,
2004 no impairment had been recorded. Changes in the carrying value of capitalized mortgage servicing rights are summarized as
follows:

|(in thousands)                   |  |  |   |       |  
|-------------------------------- |  |  | - | ----- | -
|Balance, January 1               |  |  | $ | 1,333 |  
|Servicing rights capitalized     |  |  |   | 207   |  
|Amortization of servicing rights |  |  |   | (162  | )
|Impairment of servicing rights   |  |  |   | 0     |  
|                                 |  | 
|Balance, June 30                 |  |  | $ | 1,378 |  
|                                 |  | 

The Corporation services
loans for others with unpaid principal balances at June 30, 2004 and December 31, 2003 of approximately $142,452,000, and
$138,775,000, respectively.

The following table shows the
future estimated amortization expense for mortgage servicing rights based on existing balances as of June 30, 2004. The
Corporations actual amortization expense in any given period may be significantly different from the estimated amounts
displayed depending on the amount of additional servicing rights, changes in mortgage interest rates, actual prepayment speeds,
and market conditions.

9

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# Estimated Amortization Expense:

|                                           | Amount (in thousands)
|------------------------------------------ | ---------------------
|For the six months ended December 31, 2004 |                      
|For the year ended December 31, 2005       |                      
|For the year ended December 31, 2006       |                      
|For the year ended December 31, 2007       |                      
|For the year ended December 31, 2008       |                      
|For the year ended December 31, 2009       |                      
|Thereafter                                 |                      

# (3)   STOCK OPTION PLAN

The Corporation accounts for
the stock-based compensation plan under APB Opinion No. 25. For the stock option program, no compensation cost is recognized in
connection with the granting of stock options with an exercise price equal to the fair market value of the stock on the date of
the grant. In accordance with the disclosure requirements of FAS 123, as amended by FAS 148, the following table provides the pro
forma effect on net income and earnings per share if the fair value method of accounting for stock-based compensation had been
used for all awards:

|                                               | For the Three Months Ended June 30, |  | For the Six Months Ended June 30,
|---------------------------------------------- | ----------------------------------- |  | ---------------------------------
|(in thousands, except per share data)         
|Net Income as reported                         |                                     |  | $                                
|Deduct:   Stock-based compensation, net of     |                                     | 
|tax, that would have been reported             |                                     | 
|if the fair value based method had             |                                     | 
|been applied to all awards                     |                                     |  |                                  
|                                               |                                     |  |                                  
|Pro forma net income                           |                                     |  | $                                
|                                               |                                     |  |                                  
|Basic Earnings Per Share           As Reported |                                     |  | $                                
|Pro Forma                                      |                                     |  |                                  
|Diluted Earnings Per Share        As Reported  |                                     |  | $                                
|Pro Forma                                      |                                     |  |                                  

10

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Schedule 6

# PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three and six month periods ended June 30, 2004 and 2003

The following discussion
provides information about Princeton National Bancorp, Inc.s (PNBC or the Corporation) financial
condition and results of operations for the three and six month periods ended June 30, 2004 and 2003. This discussion should be
read in conjunction with the attached consolidated financial statements and notes thereto. Certain statements in this report
constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including, but not limited to those statements that include the words
believes, expects, anticipates, estimates, or similar expressions. PNBC cautions
that such forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those
expressed or implied. Such risks and uncertainties include potential change in interest rates, competitive factors in the
financial services industry, general economic conditions, the effect of new legislation, and other risks detailed in documents
filed by the Corporation with the Securities and Exchange Commission from time to time.

# RESULTS OF OPERATIONS

Net income for the second
quarter of 2004 was $1,909,000, or basic earnings per share of $0.62 (diluted earnings per share of $0.61), as compared to net
income of $1,484,000 in the second quarter of 2003, or basic earnings per share of $0.47 (diluted earnings per share of $0.46).
This represents an increase of $425,000 (28.6%) or $0.15 per basic and diluted share. This increase is partially attributable to
the sale of the subsidiary banks credit card portfolio which resulted in an after-tax gain of approximately $285,000. Net
income for the first six months of 2004 was $3,550,000, or basic earnings per share of $1.14 (diluted earnings per share of
$1.12), as compared to net income of $3,256,000, or basic earnings per share of $1.02 (diluted earnings per share of $1.01) for
the first six months of 2003. This represents an increase of $294,000 (9.0%) or $0.12 per basic share and $0.11 per diluted share.
This increase is primarily due to the aforementioned sale of the subsidiary banks credit card portfolio and an improving net
interest margin. The annualized return on average assets and return on average equity were 1.25% and 15.48%, respectively, for the
second quarter of 2004, compared with 1.00% and 11.57% for the second quarter of 2003. For the six-month periods, the annualized
return on average assets and average equity were 1.17% and 14.07%, respectively for 2004, compared to 1.11% and 12.84%,
respectively for 2003.

Net interest income before
provision for loan losses was $5,165,000 for the second quarter of 2004, compared to $3,863,000 for the second quarter of 2003 (an
increase of $1,302,000 or 33.7%). This difference is due, in part, to the additional premium amortization of $1,184,000 recorded
in the second quarter of 2003 due to accelerated prepayments in the collateralized mortgage obligation (CMO)
portfolio. The resulting net yield on interest-earning assets (on a fully taxable equivalent basis) increased from 3.10% in the
second quarter of 2003 to 3.98% in the second quarter of 2004. Likewise, net interest income after provision for loan losses
increased to $9,874,000 for the first six months of 2004 from $8,544,000 for the first six months of 2003 (an increase of
$1,330,000 or 15.6%). In addition to the

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accelerated amortization recorded in 2003, the average cost of
interest-bearing liabilities has decreased from 2.37% for the first six months of 2003 to 1.79% for the first six months of 2004
resulting in a decrease to interest expense of $1.3 million. For the first six months of 2004, the net yield on interest-earnings
assets (on a fully taxable equivalent basis) improved to 3.94% compared to 3.51% for the first six months of 2003.

PNBC recorded a loan loss
provision of $200,000 in the second quarter of 2004 compared to $165,000 in the second quarter of 2003. For the six-month
comparable periods, PNBC recorded a loan loss provision of $300,000 in 2004 and $265,000 in 2003. The provision expense recorded
each quarter is determined by managements evaluation of the risk characteristics of the loan portfolio. For the second
quarter of 2004, PNBC had net charge-offs of $33,000, compared to net charge-offs of $280,000 for the second quarter of 2003. For
the six-month comparable periods, PNBC had net charge-offs of $104,000 in 2004 and net charge-offs of $495,000 in 2003.

Non-interest income totaled
$2,470,000 for the second quarter of 2004, as compared to $2,870,000 in the second quarter of 2003, a decrease of $400,000 (or
13.9%). This a result of the gains on sales of securities from the second quarter of 2003 of $935,000 compared to $0 in the second
quarter of 2004. Offsetting the decrease is the sale of the credit card portfolio in the second quarter of 2004 of $465,000, an
increase in brokerage fee income of $65,000 (or 48.2%), an increase in trust and farm management fees of $38,000 (or 12.0%), and
an increase in service charges on deposit accounts of $43,000 (or 5.8%). Year-to-date in 2004, non-interest income totals
$4,509,000 compared to $4,923,000 for the first half of 2003 (a decrease of $414,000 or 8.4%). Gains on sales of securities have
decreased from $935,000 to $182,000 over the comparable time frames and there has also been a decrease of $409,000 in mortgage
banking income resulting from a significant decrease in the level of loan sales. Again, offsetting these decreases is the gain
from the sale of the credit card portfolio and increases in brokerage fee income ($112,000 or 42.1%), trust and farm management
fees ($62,000 or 9.7%), and service charges on deposit accounts ($64,000 or 4.4%). Annualized non-interest income as a percentage
of total average assets was 1.62% for the second quarter of 2004, compared to 1.92% for the second quarter of 2003. Annualized
non-interest income as a percentage of total average assets was 1.48% for the first six months of 2004, compared to 1.66% for the
same period in 2003.

Total non-interest expense
for the second quarter of 2004 was $4,839,000, an increase of $310,000 (or 6.8%) from $4,529,000 in the second quarter of 2003.
The majority of the increase was in salaries/employee benefits, which increased $224,000 (or 8.8%) due to increases in number of
employees and the cost of benefits, and in advertising, which increased $57,000 (or 44.5%) due to expenses relating to the
introduction of a new checking account as part of the deposit gathering strategy. Collectively, all other categories of
non-interest expense increased $29,000 (or 1.6%). Annualized non-interest expense as a percentage of total average assets was
3.17% for the second quarter of 2004, compared to 3.04% for the second quarter of 2003. Year-to-date non-interest expenses for
2004 were $9,623,000, an increase of $676,000 (or 7.6%) from the $8,947,000 from the first half of 2003. This change is also due
to increases in salaries/employee benefits ($455,000 or 9.1%) and advertising ($114,000 or 52.3%). Annualized non-interest expense
as a percentage of total average assets was 3.16% for the first six months of 2004, compared to 3.02% for the same period in 2003.

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# INCOME TAXES

Income tax expense totaled
$687,000 for the second quarter of 2004, as compared to $555,000 for the second quarter of 2003. The effective tax rate was 26.5%
for the three months ended June 30, 2004 compared to 27.2% for the three months ended June 30, 2003. Income tax expense totaled
$1,210,000 for the first six months of 2004, as compared to $1,264,000 for the first six months of 2003. The effective tax rate
was 25.4% for the six months ended June 30, 2004 compared to 28.0% for the six months ended June 30, 2003. The lower effective tax
rates in 2004 are partially due to an increase in the amount of interest income earned from municipal (tax-exempt) securities.

# ANALYSIS OF FINANCIAL CONDITION

Total assets at June 30, 2004
increased to $614,277,000 from $609,737,000 at December 31, 2003 (an increase of $4.5 million or 0.7%). Total deposits at June 30,
2004 decreased to $536,341,000 from $537,817,000 at December 31, 2003 (a decrease of $1.5 million or 0.3%). Comparing categories
of deposits at June 30, 2004 to the December 31, 2003 totals, interest-bearing demand deposits increased $3.9 million (or 2.2%)
and savings deposits increased $2.9 million (or 5.0%). Conversely, time deposits decreased $5.1 million (or 2.2%) and demand
deposits decreased by $3.1 million (or 4.8%). Borrowings, consisting of customer repurchase agreements, notes payable, treasury,
tax, and loan (TT&L) deposits, federal funds purchased, and Federal Home Loan Bank advances, increased from
$16,161,000 at December 31, 2003 to $24,502,000 at June 30, 2004 (an increase of $8.3 million or 51.6%) due to an increase of $9.2
million in federal funds purchased on June 30, 2004. Investment balances totaled $170,219,000 at June 30, 2004, compared to
$169,892,000 at December 31, 2003 (an increase of $327,000 or 0.2%).

Loan balances, net of
unearned interest, increased to $388,836,000 at June 30, 2004, compared to $383,053,000 at December 31, 2003 (an increase of $5.8
million or 1.5%). Non-performing loans decreased, totaling $709,000 or 0.18% of net loans at June 30, 2004, as compared to
$969,000 or 0.25% of net loans at December 31, 2003.

For the six months ended June
30, 2004, the subsidiary bank charged off $233,000 of loans and had recoveries of $129,000, compared to charge-offs of $579,000
and recoveries of $84,000 during the six months ended June 30, 2003. The allowance for loan losses is based on factors that
include the overall composition of the loan portfolio, types of loans, underlying collateral, past loss experience, loan
delinquencies, substandard and doubtful credits, and such other factors that, in managements reasonable judgment, warrant
consideration. The adequacy of the allowance is monitored monthly. At June 30, 2004, the allowance was $2,446,000 which is 345.0%
of non-performing loans and 0.63% of total loans, compared with $2,250,000 which was 232.2% of non-performing loans and 0.59% of
total loans at December 31, 2003.

At June 30, 2004, impaired
loans totaled $188,000 compared to $235,000 at December 31, 2003. Loans 90 days or more past due and still accruing interest at
June 30, 2004 were $10,000 compared to $44,000 at December 31, 2003. The balances of non-performing and impaired loans continue to
be below industry averages. There is a specific loan loss reserve of $7,000 established for impaired loans as of June 30, 2004
compared to a specific loan loss reserve of $15,000 at December 31, 2003. PNBCs management analyzes the allowance for loan
losses monthly and believes the current level of allowance is adequate to meet probable losses as of June 30, 2004.

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# CAPITAL RESOURCES

Federal regulations require
all financial institutions to evaluate capital adequacy by the risk-based capital method, which makes capital requirements more
sensitive to the differences in the level of risk assets. At June 30, 2004 total risk-based capital of PNBC was 11.47%, compared
to 11.22% at December 31, 2003. The Tier 1 capital ratio increased from 7.70% at December 31, 2003, to 7.83% at June 30, 2004.
Total stockholders equity to total assets at June 30, 2004 decreased to 8.19% from 8.34% at December 31, 2003.

# LIQUIDITY

Liquidity is measured by a
financial institutions ability to raise funds through deposits, borrowed funds, capital, or the sale of assets. Additional
sources of liquidity include cash flow from the repayment of loans and the maturity of investment securities. Major uses of cash
include the origination of loans and purchase of investment securities. Cash flows used in investing activities, offset by those
provided by operating and financing activities, resulted in a net decrease in cash and cash equivalents of $4,042,000 from
December 31, 2003 to June 30, 2004. This decrease was primarily due to a net increase in loans. For more detailed information, see
PNBCs Consolidated Statements of Cash Flows.

# FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The subsidiary bank is party
to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The contract amounts of those instruments reflect the extent of involvement the subsidiary bank has in particular
classes of financial instruments.

The subsidiary banks
exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual notional amount of those instruments. The subsidiary bank
uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. At
June 30, 2004 commitments to extend credit and standby letters of credit were approximately $106,317,000 and $6,479,000,
respectively.

Commitments to extend credit
are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The subsidiary bank evaluates each customers creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, by the subsidiary bank upon extension of credit is based on managements credit
evaluation of the counter party. Collateral held varies, but may include real estate, accounts receivable, inventory, property,
plant and equipment, and income-producing properties.

Standby letters of credit are
conditional commitments issued by the subsidiary bank to guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit

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is essentially the same as that involved in extending loan facilities to
customers. The subsidiary bank secures the standby letters of credit with the same collateral used to secure the loan.

# EXPANSION PLANS

In the second quarter of
2004, the Corporation completed the purchase of property in Aurora, Illinois. The construction of the new bank facility will begin
in early 2005. Once the Aurora facility is completed, a new bank facility will also be built on the Elburn, Illinois property
which was purchased in July of 2003 with an expected completion of 2006.

# LEGAL PROCEEDINGS

There are various claims
pending against PNBCs subsidiary bank, arising in the normal course of business. Management believes, based upon
consultation with legal counsel, that liabilities arising from these proceedings, if any, will not be material to PNBCs
financial condition.

# QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material
change in market risk since December 31, 2003, as reported in PNBCs 2003 Annual Report on Form 10-K.

# IMPACT OF NEW ACCOUNTING STANDARDS

In December 2003, the FASB
issued FASB Interpretation 46, Consolidation of Variable Interest Entities (FIN 46R), which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation 46, Consolidation of Variable Interest
Entities, which was issued on January 17, 2003. Adoption of this Statement did not have a material effect on the
Corporations consolidated financial statements.

In March 2004, the Securities
and Exchange Commission (SEC) issued Staff Accounting Bulletin 105, Application of Accounting Principles to Loan
Commitments, (SAB 105). SAB 105 applies to all registrants that issue loan commitments that relate to the origination of
mortgage loans that will be held for sale and applies specifically to loan commitments that are issued after March 31, 2004.
Adoption of this Statement did not have a material effect on the Corporations consolidated financial statements.

# EFFECTS OF INFLATION

The consolidated financial
statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America and practices within the banking industry which require the measurement of
financial condition and operating results in terms of historical dollars, without considering the changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial
institutions performance than the effects of general levels of inflation.

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# PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

The
following table sets forth (in thousands) details of average balances, interest income and
expense, and resulting annualized rates for the Corporation for the periods indicated,
reported on a fully taxable equivalent basis, using a tax rate of 34%.

|                                             |  | 
|-------------------------------------------- |  | 
|
|
|Average Interest-Earning Assets              |  | 
|Interest-bearing deposits                    |  | 
|Taxable investment securities                |  | 
|Tax-exempt investment securities             |  | 
|Federal funds sold                           |  | 
|Net loans                                    |  | 
|                                             |  | 
|Total interest-earning assets                |  | 
|                                             |  | 
|Average non-interest earning assets          |  | 
|                                             |  | 
|Total average assets                         |  | 
|                                             |  | 
|Average Interest-Bearing Liabilities         |  | 
|Interest-bearing demand deposits             |  | 
|Savings deposits                             |  | 
|Time deposits                                |  | 
|Interest-bearing demand notes                |  | 
|issued to the U.S. Treasury                  |  | 
|Federal funds purchased and                  |  | 
|securities repurchase agreements             |  | 
|Advances from Federal Home Loan Bank         |  | 
|Borrowings                                   |  | 
|                                             |  | 
|Total interest-bearing liabilities           |  | 
|                                             |  | 
|Net yield on average interest-earning assets |  | 
|                                             |  | 
|Average non-interest-bearing liabilities     |  | 
|Average stockholders equity                 |  | 
|                                             |  | 
|Total average liabilities and                |  | 
|stockholders equity                         |  | 
|                                             |  | 

The
following table reconciles tax-equivalent net interest income (as shown above) to net
interest income as reported on the Consolidated Statements of Income.

|                                      | For the Six Months EndedJune 30,
|------------------------------------- | --------------------------------
|
|Net interest income as stated         |                                 
|Tax equivalent adjustment-investments |                                 
|Tax equivalent adjustment-laons       |                                 
|                                      |                                 
|Tax equivalent net interest income    |                                 
|                                      |                                 

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# Schedule 7.   Controls and Procedures

|(a) |  | Disclosure
controls and procedures.   We evaluated the effectiveness of the design and operation of our disclosure controls
and procedures as of June 30, 2004. Our disclosure controls and procedures are the controls and other procedures that we designed
to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we
file with or submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer, and Todd D. Fanning, Vice-President and
Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Sorcic and Fanning
concluded that, as of the date of their evaluation, our disclosure controls were effective.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Internal
controls.   There have not been any significant changes in our internal accounting controls or in other factors
during the quarter ended June 30, 2004 that could significantly affect those controls.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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INDEX TO EXHIBITS

| |  | ExhibitNumber |  | Exhibit                                                                                                                               
| |  | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 31.1          |  | Certification of Tony J. Sorcic required by Rule 13a-14(a).                                                                           
|
| |  | 31.2          |  | Certification of Todd D. Fanning required by Rule 13a-14(a).                                                                          
|
| |  | 32.1          |  | Certification of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. 
|
| |  | 32.2          |  | Certification of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

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